Sustainable investors faced with an ever-expanding range of Environmental, Social, and Governance (ESG) factors and their associated metrics may sometimes find it hard to see the wood for the trees. This is where innovative asset managers will take a structured, thematic approach towards building a proprietary framework for identifying long-term opportunities. One case in point is Royal London Asset Management (RLAM), whose fund manager George Crowdy sat down with NordSIP to elaborate on the firm’s novel approach, which captures opportunities at the intersection of sustainability and growth through a unique lens based on “Atoms, Bytes, and Genes.”
The traditional focus on ESG metrics has driven sustainable investing for many years. While acknowledging that ESG analysis remains crucial, Crowdy suggest that the world now needs a broader framework to properly capture emerging opportunities across various sectors. This is where RLAM’s concept of Atoms, Bytes, and Genes comes into play, as Crowdy explains: “It is really a way for us to look at the world more broadly, in such a way as to better identify exciting secular growth investment opportunities.” The RLAM framework is based on ‘Atoms’ representing the physical world, encompassing industries related to infrastructure and decarbonisation. ‘Bytes’ refer to the digital world, especially the booming sector of Artificial Intelligence (AI) and digital infrastructure. Finally, ‘Genes’ encapsulate the healthcare and biotech sectors, where rapid advancements in medical technology are opening up new investment possibilities.
Crowdy emphasises the interconnectedness of these three domains: “I think it’s such an interesting time to look at the world through this lens. These themes have all emerged as really exciting secular growth opportunities and in each one we can identify potential new trillion-dollar market opportunities.”
Atoms: The physical world and its investment potential
Crowdy describes the Atoms category, which focuses on the physical elements of the economy, including infrastructure, construction, and energy. He notes that while this is not a particularly new area of focus, recent developments have nevertheless generated fresh investment opportunities. One significant driver is the need for infrastructure upgrades, particularly in regions like the United States, where decades of underinvestment have left the country’s infrastructure ‘creaking at the seams,’ as Crowdy puts it, and therefore ripe for major investment.
Another key driver within the Atoms category is the reshoring of supply chains, a trend accelerated by the COVID-19 pandemic and ongoing geopolitical tensions. “One thing that we all learned through the pandemic was just how fragile global supply chains are,” explains Crowdy. This reshoring trend, coupled with government incentives such as the $280 billion worth of subsidies allocated to semiconductor manufacturing in the U.S., is creating a significant demand for infrastructure development and investment.
Crowdy also highlights the importance of electrification in driving investment opportunities within the Atoms category: “The transition to electric vehicles (EVs) is probably going a little bit slower than we might have thought five or so years ago,” he notes. However, he is optimistic about the long-term prospects for EVs, especially as this transition will require massive investments in physical infrastructure, from charging stations to grid enhancements. Crowdy also notes that electrification is also being applied to buildings as part of environmental and energy efficiency driven retrofitting. In terms of specific companies and sectors, Crowdy points to a broad range of opportunities in specific fields such as semiconductors, sustainable construction materials, better building insulation and more efficient heating, ventilation, and air conditioning (HVAC) systems. “These can be specialist firms or large companies like Schneider Electric that touch on many of these themes across multiple angles,” he says, underscoring the diversity of investment options within this framework.
Bytes: The digital revolution and AI’s role in sustainability
The Bytes component of RLAM’s framework focuses on the digital economy, with AI at the forefront of this ongoing socio-economic revolution. AI’s potential impact on the economy is immense, but this comes with sustainability and ethical challenges. As technology companies expand their Large Language Models (LLMs) they employ enormous computational power that requires vast amounts of energy and water-cooling. “AI data centres consume about six times the amount of power as a traditional data centre,” acknowledges Crowdy. However, despite the remaining concerns about the environmental footprint of this burgeoning technology he remains optimistic about the potential of AI. Crowdy believes that we are still in the early stages of AI’s development, with many opportunities yet to be realised. “While AI is something that has been spoken about for 30 or 40 years, the advancements in semiconductor technology and generative AI are really making people think that it is something that is going to have a very profound impact on every industry,” he says.
When challenged on the sustainability concerns associated with AI, Crowdy points to the ongoing parallel evolution of energy grids and the potential role of new technologies such as small modular reactors (SMRs) in powering advanced data centres. “Demand for energy is forecast to inflect materially higher from here, and it is going to require significant investments in the energy grid and potentially new technologies,” he adds.
Rather than the tech giants, when it comes to investment opportunities in the digital space Crowdy prefers to focus on enablers of AI and digital infrastructure: “Companies that produce advanced semiconductor chips, or which build the extreme ultraviolet lithography (EUV) machine tools required to produce those most advanced semiconductor chips are key players in this space,” he explains, adding that he also sees opportunities in the smaller U.S. firms that specialise in constructing data centres, which are experiencing huge demand as a result of AI-driven growth.
Genes: The future of healthcare and biotech innovation
The final pillar of RLAM’s framework, Genes addresses the rapidly evolving healthcare and biotech sectors. Crowdy views the demographic shifts occurring globally as a significant driver of growth in healthcare: “The number of people over the age of sixty is forecast to double in the next 25 years. Elderly people typically spend about three times the amount on healthcare than younger people,” he notes, highlighting the long-term demand implications for the sector.
Beyond these demographic drivers, Crowdy is particularly excited about the rate of innovation occurring within the healthcare sector. He points to obesity treatments as one of the most significant opportunities on the horizon: “We think this is potentially one of the biggest new market opportunities we have ever seen within healthcare,” Crowdy states. He explains that these new drugs are showing unprecedented efficacy in helping patients manage their weight, which has a positive ripple effect on reducing the incidence of related diseases such as strokes, heart attacks, and diabetes.
The Genes category also incorporates the broader impact of technological advancements in healthcare. The COVID-19 pandemic, for example, accelerated the development and acceptance of mRNA technology, which is now being used to target other viruses and diseases. “The amount of innovation happening in healthcare is phenomenal,” Crowdy says, noting that this innovation is not yet fully appreciated by the market.
As healthcare innovation continues to advance, Crowdy sees significant opportunities for investors. From targeted cancer therapies to breakthroughs in Alzheimer’s treatment, the healthcare sector is poised to benefit from ongoing research and development. “We are seeing this huge evolution from the way that cancer is being treated and much more targeted therapies,” Crowdy explains, emphasising the transformative potential of these advancements.
Balancing growth with sustainability
While RLAM’s framework of Atoms, Bytes, and Genes highlights a wide array of growth opportunities, Crowdy also acknowledges the importance of balancing these opportunities with sustainability considerations. This balance is particularly challenging in sectors like AI, where the demand for energy and resources can be at odds with environmental goals. However, Crowdy believes that innovation and sustainability can go hand in hand, and that responsible investment strategies can drive positive outcomes. He also addresses the broader question of how to approach investments in a world where growth and sustainability are sometimes seen as conflicting goals. Crowdy argues that while globalisation and efficiency have long driven economic growth, the current trends of reshoring and deglobalisation are reshaping the global economy. Nevertheless, the impact of these trends is far from uniform across all regions, as Crowdy points out: “If you were sat in a country like India or Indonesia, for example, you would very much consider that your economy was still globalising.”
Despite the various challenges faced by sustainable investors, Crowdy maintains an optimistic outlook for the future. He argues that being an optimist in the investing world has historically been more rewarding than being a pessimist. “Markets have a tendency to want to go up, companies continue to innovate, with their staff turning up every day to add value,” he says. This optimism is tempered with a realistic understanding of the risks and challenges that lie ahead, but Crowdy believes that the secular growth trends identified in the Atoms, Bytes, and Genes framework will continue to drive market performance in the years to come.
As the global economy continues to evolve, RLAM believes that the Atoms, Bytes, and Genes framework provides a comprehensive lens through which investors can identify and capitalise on sustainable growth opportunities. From infrastructure and energy to digital innovation and healthcare advancements, Crowdy believes this framework captures the key drivers of long-term value creation by looking beyond traditional ESG metrics and considering the broader trends shaping the future. “By focusing on the interconnectedness of the physical, digital, and biological worlds, RLAM’s framework offers a nuanced and forward-looking perspective on sustainable investing helps to balance growth opportunities with sustainability concerns,” concludes Crowdy.
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We carry out research across financial, ESG and climate factors as part of our investment processes. Engagement is a key aspect of our ESG and climate activities – but it is important to note that the goal of research and engagement is to identify and help quantify risk and improve overall investment returns and does not target a specific ESG or climate outcome. Different portfolios will have specific and differing investment objectives which will be reflected in their individual portfolio constructions.
Issued in September 2024 by Royal London Asset Management Limited, 80 Fenchurch Street, London, EC3M 4BY. Authorised and regulated by the Financial Conduct Authority, firm reference number 141665. A subsidiary of The Royal London Mutual Insurance Society Limited.
